Banks must speed up Brexit preparations, says European regulator

The EBA said monitoring of contingency planning by regulators showed that financial institutions are currently not ready for a situation whereby Brexit took place without a formal agreement.

In the opinion (9 page / 150KB PDF) it has issued, the EBA said it was “imperative” that financial institutions in the remaining 27 member states as well as the UK identify potential exposures and risk channels that could stem from Brexit.

Banking expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, said financial institutions were trying to prepare for an unknown scenario.

“Whilst the banks themselves are well advanced in their Brexit preparations, this publication by the EBA requesting additional oversight of banks will not necessarily be welcome by them," Anderson said. "Banks and other affected parties, including domestic regulators, cannot be expected to operate in a vacuum in terms of compliance and contingency planning if they are not in a position to understand what the final framework for Brexit is supposed to be.”

“It is accepted that there are steps that banks and other participants can and are taking to maintain access to financial markets infrastructure, as correctly noted by the EBA. However, in some instances it is the actual operators of key financial markets infrastructure who are struggling to adapt to a scenario without precedent,” he said.

“This must be part of a bigger concern for authorities and governments alike, in a process which so far has produced little concrete guidance for affected parties,” Anderson said.

The EBA said banks needed to make sure they had the right regulatory permissions and associated management capacity in place ahead of the UK's scheduled withdrawal from the EU on 29 March next year. They needed to identify risks around access to financial market infrastructures and funding markets and mitigate these, it said.

Financial institutions also needed to assess and take action to address any impacts on the rights and obligations of their existing contracts, in particular derivative contracts, ahead of time, the EBA said.

According to the EBA opinion, risks could include increased risk weights for certain UK exposures, or higher capital requirements for derivatives cleared through non-qualifying central counterparties.

Banks needed to look carefully at how new or expanded entities fitted into an existing organisational structure and assess their reliance on funding and access to that funding after Brexit, among other tasks, it said.

The EBA said financial institutions need to tell their supervising authorities of the result of their pre-Brexit assessments and plans to mitigate any risks. They also need to ensure that they communicate clearly with customers if contracts or services are affected by changes being made as a result of Brexit.

Although UK and EU negotiators had recently agreed there would be a transition period after the formal withdrawal date, the EBA warned this provided no legal certainty until a withdrawal agreement was concluded.

In its opinion, it said the actions it wanted financial institutions to take would incur cost, but said this was inevitable.

“Financial stability should not be put at risk because financial institutions are trying to avoid costs,” the EBA said.